UPDATE 2-Colombia ups interest rate to 4 pct, buying more dollars

Fri Jun 20, 2014 4:13pm EDT

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By Peter Murphy and Nelson Bocanegra

BOGOTA, June 20 (Reuters) - Colombia's central bank on Friday raised its benchmark lending rate by 25 basis points for the third straight month, an increase aimed at containing a recent rise in still-low inflation after a surge in first-quarter economic growth.

The seven-member policy-making board increased borrowing costs a quarter point to 4.00 percent, the first time the rate has been that high since January 2013. The decision, reached unanimously, came a day after strong 6.4 percent first-quarter growth was announced.

The bank also extended and doubled the size of its dollar purchases with a plan to buy up to $2 billion between July and September to bolster reserves and compound ongoing efforts to weaken the peso which the government says is too strong.

"We have ample and sufficient ammunition to take part in the foreign exchange market ... to avoid the peso being over-valued," Finance Minister Mauricio Cardenas, a member of the central bank's board, told reporters after the meeting.

The existing dollar purchase program expires at the end of June with planned purchases of $1 billion since April.

Cardenas said expanded currency intervention would also plump up a "cushion" against external shocks to which emerging markets have been particularly vulnerable in recent years, with low interest rates in large economies redirecting speculative capital towards developing economies.

Cardenas said this week Colombia's strong first-quarter growth was the fastest in Latin America and bucked a slowdown in growth that the region's largest economies were currently experiencing.

A Reuters survey of analysts on Monday showed that 20 of 23 expected the quarter-percent rate increase, but four switched their view on Thursday to a half-percent increase after the surprisingly strong growth data was released.

Friday's rate increase was the third quarter-point rise in as many months. Policymakers say smaller incremental increases to contain inflationary pressures early will avert larger monetary adjustments later on.

Bank director Jose Dario Uribe said the economy's strong performance could lead to greater inflationary pressures and take full-year 2014 inflation above 3 percent, the midpoint of the central bank's 2-4 percent target inflation range.

Colombia's president, Juan Manuel Santos, was re-elected to a second term last Sunday and his next government will be inaugurated in early August. There is no indication so far of whether he will appoint a new finance minister. (Additional reporting by Julia Cobb and Carlos Vargas; Editing by Chizu Nomiyama and Nick Zieminski)

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